Why utilities charge convenience fees to pay by credit card

Companies say they're passing on the cost, though check payments are dwindling

Many utilities in the U.S.
continue to charge convenience fees for paying utility bills by credit or debit
card, even though the use of checks to pay bills is dwindling.

And if these convenience fees
don’t pop up on your utility bill, they’re likely built into the rates you pay
for electricity, water or natural gas.

That’s unfortunate, as savvy
cardholders who otherwise might rack up cash back or miles by charging their
utility bills are paying a price – rewards lost to convenience fees. Sure, services such as Plastiq and Tio may let you pay some utility bills with plastic, but it will cost you a fee to do so. In many cases, the convenience fees or service fees cost more than the cash back or points you might have earned.

E-payments increase, check
use dwindles
John Hazen, senior director in the utilities and infrastructure practice at market research company J.D.
Power, says paying utility bills electronically – including by credit and debit
cards – is on the rise. Nationwide, the share of U.S. utility consumers writing
and sending checks to pay their bills fell from 20 percent in 2016 to 17
percent in 2017, according to a J.D. Power study.

But as even more utility customers enjoy
the convenience of paying their bills electronically, not all of them are
thrilled about the credit and debit card fees that can accompany that
convenience, Hazen says.

Overall, he says, customer
satisfaction ratings for utilities that assess those convenience fees are lower
than ratings for utilities that fold those convenience fees into their utility rates.

“No matter what your economic
status is,” Hazen says, “there’s just an annoyance – whether you make a lot of
money or you don’t make a lot of money – in having to pay the fee.”

Still, he notes, four of the five utilities that rate highest for billing and
payment satisfaction in J.D. Power surveys do
charge convenience fees for credit and debit card payments.

“The trend is clearly more utility payments being made by debit and credit card. If credit card companies and third-party payment processors continue to charge a fee for these transactions, utilities will continue to have to recuperate that cost in an equitable manner.”

No statistics are available
on just how much money American utility customers cough up in convenience fees,
but a back-of-the-envelope estimate shows it could be an electrifying amount.

If you look solely at
electricity providers, the U.S. has roughly 135 million customers. If
three-fourths of those electric customers paid their bills by credit or debit
card and their monthly convenience fee was $2.50, the charges would add up to
$3.3 billion a year.

To be sure, that’s an extreme
example, but it illustrates how much money might be at stake.

A push to make utility payments fee free
In an article published in June by the Electric
Light & Power trade publication, Penni McLean-Conner, chief customer officer at East
Coast electricity provider Eversource Energy, pressed the case for utility
payments made by holders of credit and debit cards to be free of fees.

While utilities normally accept
credit and debit cards as payment methods, McLean-Conner wrote, most investor-owned, municipal and
co-op utilities charge a convenience fee to recoup the higher costs incurred
for handling those payments compared with more traditional payment methods,
like old-fashioned checks.

In these situations,
utilities customarily are passing along fees that they’ve been hit with by
companies that process the card payments – namely third-party processors like
Western Union’s Speedpay service. Utilities aren’t supposed to turn a profit on
those fees.

Today, more than 30
utilities in the U.S. and Canada provide fee-free credit and debit card
processing, according to McLean-Connor.

“Offering fee-free
credit and debit card payments is fundamentally about serving our customers in
the manner and channels in which they want to be served,” she wrote.

The National
Association of State Utility Consumer Advocates took a similar stance in 2012. The organization passed a resolution
urging utilities to eliminate convenience fees for credit and debit card
payments.

One recommended fix:
Handle payments in-house instead of through a card-processing company, thus cutting
out the costly middleman.

The association noted
the convenience fees
burden low-income utility customers who frequently pay their bills with prepaid
debit cards. Furthermore, the group argued, convenience fees unfairly punish
utility customers who might make several payments a month.

Fee-free options for utility payments
For their part, utilities note that they offer card-less options for people
seeking to avoid convenience fees, such as making payments by mail or in person,
or by using an e-check.

In California’s Central Valley, the Modesto Irrigation District dropped
Western Union’s Speedpay as a third-party payment processor about six years ago
and simultaneously dumped its per-payment convenience fee, spokeswoman Melissa
Williams says.

“The cost justification for absorbing these fees is that we’re more likely to receive payments if there aren’t additional fees associated with convenient payment methods such as credit and debit cards.”

Since installing an e-billing service supported by outside vendor
CyberSource, the district has blended card-processing costs into its utility
rates.

“The cost justification for absorbing these fees is that we’re more
likely to receive payments if there aren’t additional fees associated with
convenient payment methods such as credit and debit cards,” Williams says.

“It also helps minimize resources that would have to otherwise be
dedicated to debt collection.”

Passing on the cost
to utility customers
Duke Energy, one of the country’s largest for-profit utilities, charges a
convenience fee of $1.50 for online or phone payments made by a residential customer.

“No part of the
convenience fee goes to Duke Energy. Other companies are able to add
the processing costs of these requests to the overall pricing of their products
and services,” spokeswoman Meredith Archie says.

“Because Duke Energy
is a regulated utility, we are unable to do that. Only customers who choose to
use this service will be charged the convenience fee.”

A review of a handful of other
U.S. utilities found standard convenience fees for residential customers
ranging from $2.25 to $3.95 per payment. At the high end of the range, that
would total nearly $48 for 12 monthly payments.

A 2016 survey by the American
Public Power Association, which represents community-owned electric utilities,
found that 92 percent of its members took payments by credit card and 89
percent took payments by debit card.

A little over half of the
card-accepting utilities absorbed the convenience fees (like the Modesto
district does), while a little less than half required customers to cover them
(like Duke Energy does). In many cases, the fees hovered between $3.70 and $4
per payment.

Fees paid by
card-using customers “are charged to cover the cost of the transaction rather
than having other customers subsidize the cost," says
Ursula Schryver, director of education and customer programs at the American
Public Power Association.

“State and local laws vary, which accounts for the different policies
among utilities,” she says.

‘Somebody’s paying … it’s not charity’
Mark Toney, executive director of The Utility Reform Network (TURN), an
advocacy group for utility customers in California, says his organization
prefers that a utility not spread the convenience fees among all of its
customers, but instead pin the fees only on those customers who pay their bills
by credit or debit card.

Generally, he says, consumer advocacy groups
across the country share that view.

“We come from the standpoint as a consumer
advocate that there is no free money,” Toney says. “The truth is, somebody’s
paying for that stuff. It’s not charity from anybody’s pocketbook.”

Toney says a lot of utilities really would
rather distribute convenience fees among all their customers. However, he says,
it’s not so easy to do, since a utility must gain permission from state
regulators or lobby for state legislative changes in order to do that.

As such, Toney says he doesn’t think utilities
are “the bad guys” when it comes to charging convenience fees.

Convenience fees are here to stay, for now
So, what’s ahead for utility customers who pay bills by credit or debit card?
Convenience fees are likely to remain an inconvenience for some time.

“The
trend is clearly more utility payments being made by debit and credit card,”
the American Gas Association, a trade group for natural gas utilities, says in
a statement.

“If
credit card companies and third-party payment processors continue to charge a
fee for these transactions, utilities will continue to have to recuperate that
cost in an equitable manner.”

Credit
card reward hounds, meanwhile, will have to settle for earning less cash back
and points value if they choose to put their utility bills on plastic.

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